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Employer Fails to Pay $328,000 Bonus, Employee Sues, Everyone Loses

What do you think one of your employees might say if you decided not to pay over $300,000 in owed compensation? Well, the Ontario Superior Court of Justice recently considered just that, and concluded that the employee did not reasonably respond in alleging constructive dismissal of employment. But, of course, it’s not so simple.

Background

Chapman v. GPM Investment Management and Integrated Asset Management Corporation1 involved a constructive dismissal claim brought by the former CEO of the defendant, GPM. In his position, Mr. Chapman enjoyed remuneration in excess of $1 million per year.

Despite his senior position and substantial remuneration, the terms of Mr. Chapman’s employment were set out in a relatively informal memorandum of understanding (the MOU). The key term of the MOU to this case was the bonus clause, which provided for an annual bonus equal to 10% of pre-tax profits, subject to certain specified exemptions.

Mr. Chapman’s claim arose from events in 2011, when GPM divested itself of a land interest that was considered a one-off investment such that the capital gains realized from the sale were considered to fall outside of the definition of “pre-tax” profits for the purposes of the MOU. In light of this, the capital gains were not included in Mr. Chapman’s bonus calculation, a decision that meant that Mr. Chapman would miss out on payment of $328,862.

Mr. Chapman disagreed with GPM, taking the position that the failure to pay him the significant bonus was a fundamental breach of the terms of his employment, and therefore constituted constructive dismissal. As a result, Mr. Chapman brought his action seeking, among other things, wrongful dismissal damages in the amount of $3 million and payment of his $328,862 bonus.

In considering Mr. Chapman’s claim, the Court applied the two branch test for constructive dismissal, as recently explained by the Supreme Court of Canada,2 which asks:

Has the employer unilaterally breached a term of employment such that a reasonable person in the position of the employee would conclude that an essential term of employment is being substantially changed?

OR

Has the employer engaged in a course of conduct that, when viewed in light of all of the circumstances, would lead a reasonable person to conclude that the employer no longer intends to be bound by the terms of the employment contract?

On the facts of this case, the Court agreed that the profits earned ought to have been included in determining Mr. Chapman’s bonus. Accordingly, the failure to pay Mr. Chapman a $328,862 bonus from the sale of the land was a breach of the terms of his employment.

However, the Court did not agree that this failure to pay amounted to constructive dismissal of Mr. Chapman’s employment. While the bonus ought to have been paid, it was the result of a divergence in the interpretation of the MOU’s bonus clause as it applied to a one-off transaction. There had been no actual alteration to the terms of employment that would reduce Mr. Chapman’s compensation on a permanent basis and, in fact, the evidence established that all parties understood that Mr. Chapman’s employment and compensation would otherwise continue unchanged. Further, there was no other conduct by the employer to support a conclusion that it no longer intended to be bound by the employment relationship.

The Court had little sympathy for Mr. Chapman’s argument that it was untenable for him to sue his employer for the failure to pay his bonus and continue working, and thus constructive dismissal was the only reasonable position available to him. To this, the court noted that Mr. Chapman could have pursued further discussions with respect to the bonus or sought mediation and/or arbitration on this issue. While a Court may come to a different conclusion in this respect if considering a less sophisticated employee, it was also noted more generally that an employee can in fact sue for damages without alleging constructive dismissal.

While Mr. Chapman’s constructive dismissal claim failed, it is important to note that GPM was still ordered to pay Mr. Chapman his $328,862 bonus. Further, GPM had counter-claimed against Mr. Chapman for over $1.6 million in relation to an alleged breach of his duties while employed. Not only did this claim against Mr. Chapman fail, the Court concluded that GPM’s parent company, IAM, was obligated to indemnify him for his defence costs pursuant to a directors’ and officers’ indemnity it had provided to him during his employment.

Takeaways

Constructive dismissal can arise both when an employer breaches a single substantial term of employment or engages in a course of conduct that, when added up, demonstrates an intention to no longer be bound by the employment contract.

The test for constructive dismissal is an objective one. Neither the employee’s perceptions nor the employer’s motives will be persuasive against objective evidence as to how a reasonable employee would have reacted in the circumstances.

Absent other compounding conduct by the employer, a onetime non-payment of a bonus is unlikely to constitute constructive dismissal.

Where an employer’s breach of the terms of employment does not give rise to constructive dismissal, an employee may still have the right to sue for damages; an awkward proposition for an ongoing employment relationship.

In the end, this decision demonstrates how a constructive dismissal claim can be a “lose-lose” situation for employer and employee. For this reason, alternative dispute resolution options are often worth exploring before engaging in full out litigation, particularly if the employment relationship is one you wish to maintain.

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